Companies jockey for piece of $30 billion spy market

ChristopherHinton

PARIS (MarketWatch) -- L-3 Communication Holdings Inc. and Hawker Beechcraft Corp. on Tuesday unveiled an exportable version of their King Air 350, which already is being used by the U.S. military for intelligence, surveillance and reconnaissance in Afghanistan.

The move, announced at the Paris Air Show, seeks to tap into one of the few growth markets for aviation during the global recession.

L-3
LLL, +0.09%
and Hawker Beechcraft said they expect to sell 150 of the surveillance planes over the next 10 years for about $2.5 billion, including after-market services. In the United States, the market could demand as many as 75 planes for a total of $1.3 billion.

The two companies already have signed an agreement with the U.S. Defense Department to supply the military with 37 planes for about $1 billion. The first ISR King Air 350 for the United States entered service last week in Afghanistan.

The turboprop plane is equipped with L-3 intelligence, surveillance and reconnaissance equipment, known as ISR gear. This includes full-motion video and sensors, infrared radar, eavesdropping equipment and communication links to ground troops and command centers, as well as onboard data analysis.

On top of the $8 million price tag for the airplane, L-3 expects to make $5 million to $10 million installing the ISR equipment.

The King Air 350 can fly up to 35,000 feet, beyond most people's field of vision on a typical day, making it practically invisible from the ground. In Afghanistan, it will be used to weed out Taliban and al-Qaeda troops, but also has the potential to be used in border patrol and agriculture, according to L-3.

Makers of manned aircraft want to compete by offering low-cost planes they say have an advantage over drones: the human intelligence they carry.

Referring to the ISR platform, Terry Harrell, vice president of special-mission programs for Hawker Beechcraft, said: "Special missions continue to be a growth area in the business and a bright spot in the economic downturn."

ISR is becoming big business for military contractors. In April, the Defense Department, which every year buys up more than 40% of the world's military hardware, said it would expand its ISR budget by $2 billion with a focus on growing its fleet of unmanned, surveillance aircraft and increasing its capacity for intelligence gathering and analysis.

But makers of manned aircraft want to compete too, and are offering low-cost planes they say have an advantage over drones: the human intelligence they carry.

Worldwide, the market for ISR -- including spy planes, communications equipment, data management and intelligence analysis -- could climb to $44.5 billion over the next 10 years from about $30 billion today, according to equity research firm Frost & Sullivan.

"Especially since the last two wars after 9/11, it's been a very high-growth area and continues to be," according to Brad Curran, an analyst with Frost & Sullivan.

Earlier this month, General Dynamics Corp.
GD, +0.99%
said it would purchase electro-optics maker Axsys Technologies Inc. for $643 million to boost its presence in ISR applications. The company builds sensors and systems for camera stabilization in aircraft.

Axsys anticipates sales of about around $280 million this year and has a backlog of $162.1 million as of March 28.

The deal is expected to close sometime this summer, and it places General Dynamics in competition with the established players in the field of sensors: Northrop Grumman Corp.
NOC, +0.30%
Raytheon Co.
RTN, +0.10%
and of course L-3.

For L-3's part, the New York company predicts ISR sales in 2009 will bring in about $2.9 billion in revenue, up 13% from a year ago, and it expects to grow sales in that area by at least 10% for the foreseeable future.

There are competitors to the King Air 350, but L-3 and Hawker Beechcraft say they think they have a more cost-effective aircraft as the King Air 350 has been on the commercial market since the early 1970s, with more than 6,000 sold worldwide.

The price of an airplane typically comes down as more are produced, and maintenance costs also come down as more parts are made available.

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